Dow plunges, then rebounds, after Fed rate cut
NEW YORK -- The Dow Jones industrial average swung wildly Tuesday but rebounded from steep early losses after a surprise interest rate cut from the nation's central bank.
By noon. ET, the Dow was down about 180 points and was hovering in the 11,900 range. It fell more than 450 points within minutes of the opening of the New York Stock Exchange, then rebounded to a drop in the 55-point range, then began slipping again late in the morning.
Reacting to more signs of a weakening economy, the U.S. Federal Reserve earlier Tuesday made a surprise three-quarters of a percentage point cut to short-term interest rates before the open on Wall Street, a move that investors hope will help stabilize jittery financial markets.
The cut, which came before the Fed's meeting later this month, lowered the fed funds rate to 3.5% from 4.25%.
The tepid reaction of investors to the surprise cut may be due to a sense that the Fed senses the economy is in worse shape than it originally thought.
"By cutting 75 basis points ahead of their meeting, the Fed has sent some deep concerns in the hearts and minds of investors. The concern is economic conditions are worse than we believe," says Hugh Johnson, chief investment officer at Johnson Illington Advisors. "The surprise cut raises concerns as opposed to confidence."
In a brief statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth." The Fed also said the "broad financial markets have continued to deteriorate."
At 8 a.m. ET, Treasury Secretary Henry Paulson tried to calm investors by talking to the U.S. Chamber of Commerce about the underlying strength of the economy and the Bush administration's willingness to work with Congress to quickly enact an economic stimulus package.
"Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible," Paulson said.
Although Paulson said he was confident about the "underlying strength of the global economy," the treasury secretary was blunt when it came to describing the current state of the economy.
"The U.S. economy is experiencing a significant housing correction," he said. "This was inevitable after years of unsustainable home price appreciation, and it is exacting a penalty to our economic growth. That, coupled with high energy prices and capital market turmoil has caused our economy to slow materially in recent weeks."
Investors are hoping the cut will provide a floor under stock prices. The surprise cut was not too surprising, given that the stock market plunge that began in the U.S. at the start of the year, and which has dragged down the S&P 500 by 15.3% year-to-date, has spread to global stock markets.
The big fear of stock investors is that a U.S. recession will drag down economic growth around the globe.
At the White House, a spokeswoman said President Bush is not ruling out the possibility of a larger economic stimulus package than the $145 billion program already outlined.
"I'm not going to close the door, but I'm not suggesting that anyone believes it has to be bigger" than the roughly $145 billion figure already discussed, White House press secretary Dana Perino told reporters.
Bush last week offered the outline of a short-term economic boost, but the slumping of the global economic market since then has raised the question of whether he's willing to broaden the package.
Outside the USA, Asia suffered a second big sell-off and stock indexes in Europe plunged, then came back a bit.
Major European stock indexes plunged at their opening, but rebounded at mid-day on the news of the Fed cut. They slid again and remained volatile toward closing.
By late afternoon, Britain's FTSE 100 index of most capitalized companies was 1.1% higher, while Germany's Dax lost 2.2%, and France's Cac was down 0.6%.
In Asia, Tokyo's benchmark Nikkei average lost an additional 4.4% by midday Tuesday, when it was still Monday evening in the USA, hitting a two-year low. China's benchmark Shanghai Composite Index closed down 7.2%, Australian stocks fell 7.8%, Korea was down 4.4% and India's fell by more than 12% at one point.
"There are now fears of a much deeper, quicker and nastier U.S. slowdown," said Stephen Green, head of China research for Standard Chartered Bank in Shanghai. "There are rumors of the Fed cutting 75 basis points, not 25 as rumored earlier. Usually, when the markets hit trouble, money goes back to the U.S., but where do you put your money now? There is a lot of money wondering where to go," Green said.
"Asia is just collateral damage. It is surprising how well it has stood up, for so long. Asia was the last man standing," said Christopher Wood, equity strategist at CLSA, an Asian brokerage house headquartered in Hong Kong.
Until recently, many economists, such as Allen Sinai of Decision Economics, were confidently predicting that major economies in Europe and Asia would shake off any ill effects from a U.S. recession. The gathering market rout indicates growing fears that such "decoupling" will prove a mirage.
The global economy is expected to grow 4.8% this year, down from 5.2% last year and 5.4% in 2006, according to the International Monetary Fund. But with global markets falling hand-in-hand, some fear further deterioration. "We hope things aren't as bad as they may look," said Andrej Bajuk, finance minister of Slovenia, which holds the rotating European Union presidency.
Oil and gold prices also fell. Light, sweet crude for February delivery fell to $87.72 a barrel on expectations that slower U.S. growth will lead to less demand for crude. Spot gold, which usually benefits from market uncertainty, fell to a two-week low of $855.20 per troy ounce.
Contributing: David J. Lynch; Adam Shell; Barbara Hagenbaugh; Sue Kirchhoff; Calum MacLeod; Jeffrey Stinson; wire reports.